This was the name of the most popular song about the Great Depression. Written by the lyricist E.Y. “Yip” Harburg and composer Jay Gorney, the song was part of the 1932 musical New Americana.It became best known, however, through recordings by Bing Crosby and Rudy Vallee. Both versions were released right before Roosevelt’s election to the presidency and both became number one hits on the charts.
I’m not particularly pessimistic by nature, but I downloaded the song from iTunes so I could get fully into Tuesday’s economic news. And that news simply is not good. Let’s go through the list.
China. A lot of folks with more economic street cred than me blamed the 700 point sell-off yesterday on the bad news coming out China. From Larry Kudlow’s blog yesterday:
The real source of today’s stock market plunge is a collapse of China’s purchasing managers index, which fell to 40.9 in November from 45.2 in October, its fourth straight monthly drop. Inside the index, export orders fell significantly. All of this suggests big cuts in China production, employment, and investment, including infrastructure investment.
Over dinner last week, economic Nobelist Robert Mundell, who advises the Bank of China and travels there every other month, told me the Chinese economy is in bad shape. As a bulwark for the global economy, the China card is fast turning unreliable. Not only are stocks falling everywhere else in response to this disappointing China news, but commodity prices like palladium, silver, gasoline, oil, and gold are all plummeting today. I’ve only seen one news story that reported on this China economic decline, but I’m convinced it’s the main factor behind the U.S. stock drop.
Meanwhile, China’s yuan is starting to depreciate, a development that may be a function of their weakening economy, but also may be a policy change by the Bank of China toward devaluation, rather then appreciation.
On the front page of today’s Wall Street Journal is a story about the mass migration of millions of Chinese from coastal provinces back to their farms in the interior. They’re laid off, baby. And according to the WSJ, they’re not all taking it lying down. And the government is nervous – they’re afraid of ‘social problems affecting stability’, which is pleasantly euphemistic bureaucrat-speak for the fed-up:
Meng Jianzhu, China’s minister of public security, told a conference of regional government officials late last month that there are “lots of social problems affecting stability under the current circumstances,” the official Xinhua news agency reported. Among the major problems to address, Mr. Meng said: “Work should be improved on serving and managing the floating population.” Beijing has been warning local officials to take extra efforts to ensure stability, focusing their efforts on re-employment programs.
I had previously noted this ‘floating population’ and the government’s deep fears. And an ‘unstable’ China is very worrying for us because China holds massive amounts of T-Bonds. With their own internal demand tanking and exports slowing, China may well be forced to liquidate a portion of their holdings, thereby bursting the current bubble in T-bond sales.
Russia’s Ongoing Meltdown. Think we’ve got it bad here? Welcome to Russia. Old Snake Eyes was complaining yesterday about how ‘unfair’ foreign markets have been to Russian securities:
Prime Minister Vladimir Putin described the effect foreign markets have on domestic share prices as “unfair” during a government meeting Monday, saying the values of the securities do not accurately reflect those of the companies themselves.
Putin also spoke out against insider trading and again blamed the West for the country’s economic difficulties, adding that those trading on domestic exchanges would be compensated for financial losses, Interfax reported.
“Decisions concerning which securities to buy or sell on Russian markets are, for the most part, made abroad,” Putin said, the news agency reported. “Moreover, the criteria by which these decisions are made have very little connection to the actual state of our economy or Russian companies.”
At the same time, he was careful to point out that the country did not want to exclude foreign investors.
Pardon me, Vlad, while I tune up my tiny violin. Welcome to the major leagues, baby. We don’t particularly like having our economic fate in the hands of foreigners, either. So dry your tears and quit complaining. Everyone having his hand in everyone else’s pocket is the price of doing business in this world today. Oh, and just don’t do anything cute with the Ukraine or Poland or the Baltic states, will you?
The Boneheads in Washington. Since September 18, I’ve been convinced that most of the economic cognoscenti have no clue – none – about what’s happening or how to fix it. I’m convinced that millions of average Americans who have vociferously expressed their displeasure with bailouts and government interventions have more sense than all of them. Here’s a clue about how to fix this mess: get out of the way. No bailouts. No nationalization. No printing money. Each new scheme further roils the water and creates uncertainty. And uncertainty is killing us.
It was government that got us into this (think, Community Reinvestment Act, Freddie and Fanny for starters). And government is making matters worse by the day. Only the private sector can bring us through. How about a nice tax cut? It would provide instant capital for businesses. Back to Larry Kudlow’s blog:
I’d like to reiterate my support for Mr. Mundell’s idea for a 1-year tax holiday on U.S. corporate profits, then segueing to a 20 percent marginal tax rate on U.S. business from the current 35 percent rate. It is business, not government, that creates economy-growing jobs. Although U.S. profits have slipped (IRS/NIPA profits after tax have dropped 9 percent from their peak in late 2006), they still totaled $1.5 trillion thru the end of the 3rd quarter. After tax, that’s $1.1 trillion.
So, with roughly a $400 billion tax bill at stake, a tax-free holiday would provide a big pool of cash for U.S. business recovery. And a lower marginal tax rate after that would make it pay more after tax to invest in businesses. The Mundell tax cut recovery plan is especially important now that the NBER has just officially declared a recession beginning in January.
Once again, I repeat, government cannot spend our way into prosperity. However, strengthening incentive rewards would boost the animal spirit of investors and businesses to put risk money back to work. This would produce economic recovery.
Mr. Mundell is, of course, Robert Mundell, Nobel laureate and one of the few economists who knows the difference between Shinola and that other stuff.
Have a pleasant day.
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